Top 5 Misconceptions That May Cost You Money
Here are the top 5 misconceptions about RMDS that I have heard over my career which could be quite detrimental to your pocketbook.
To help dispel those misconceptions, I have created the following hypothetical situation:
Amy is fully retired and will turn age 72 on August 1, 2022. Her 2021-year end IRA balance was $100,000. Her 2021-year end 403b balance was $100,000. Her 2021-year end 401K balance was $100,000. Her Life Expectancy factor found in the Uniform Lifetime Table is 27.4.
Misconception # 1 – Amy must withdraw all her IRA upon reaching age 72. – Wrong! She is only required to take the minimum amount (calculated by dividing the balance of her IRA at the previous year end by the pre-determined factor for her age at the current year end found in the Uniform Lifetime Table in IRS publication 590). Ex: $100,000/27.4=$3,649.64 is her RMD for 2022. Amy can withdraw more than that (not required to) but if she takes less, Amy may incur a 50% penalty (can request a waiver using IRS Form 5329 along with a letter of explanation) on the amount she is short. Ex: Amy only took a $3,000 RMD in 2022, she may owe a penalty to the IRS of: $3,649.64 – $3,000 = $649.64 x 50% =$324.82 penalty. Amy will still be required to make her required withdrawal and report it as taxable income.
Misconception #2 – Amy can withdraw funds from her 403b and/or 401k to satisfy her IRA RMD. – Wrong! Each type (IRA, 403b or 401k) of retirement account has its own RMD requirement. Failure to take the proper amount from each account may result in a 50% penalty (can request a waiver using IRS Form 5329 along with a letter of explanation). In our example, Amy must withdraw $3,649.64 from her IRA and 403b and 401k before 12/31/2022.
Misconception #3 – Amy will receive information on the amount of her RMD from each of her plans. –Not Necessarily! Frequently, plan providers do not send RMD information to the account owners. Even If Amy does not receive that information, she is still responsible to make the proper RMD from each plan or face the 50% penalty (can request a waiver using IRS Form 5329 along with a letter of explanation) plus taxes discussed above. Amy will have to call the delinquent provider(s) and request the proper withdrawal forms in time to make the respective RMDs.
Misconception #4 – If Amy took withdrawals from her retirement plans prior to 2022; she can count those toward her RMD. – Wrong! Only withdrawals made in the year that she turns 72 (with one exception) count toward satisfying her RMD. Failure to make the withdrawals may result in a 50% penalty (can request a waiver using IRS Form 5329 along with a letter of explanation) plus taxes. (There is an exception for individuals in the first year of RMD to defer that amount until April 1st of the following year. That means 2 distributions would have to be taken in that year) Ex: Amy could defer taking her 2022 RMD of $3,649.64 until 4/1/2023. She would then have to take her 2023 RMD by 12/31/2023.
Misconception #5 – Amy can rollover her RMD to another retirement plan and avoid paying taxes. – Wrong! Amy must pay taxes on her RMD regardless of what she decides to do with the withdrawal. If Amy was still working, she would be able to make contributions to her IRA, 403b and 401k plans and may be able to defer her RMDs from those plans (employer specific).
RMD rules have many nuances and potential traps for the unknowledgeable. Failure to comply with the IRS rules can potentially cost you a substantial amount in penalties and taxes. It is always best to consult with a tax professional and/or retirement specialist to help ensure that your specific situation is handled properly, and you do not pay the IRS more than you are legally obligated to.
The author of this article, George S. Urist, MBA, CFP® is President and Owner of Urist Financial and Retirement Planning, Inc., located in East Syracuse, New York. George Urist has been a CERTIFIED FINANCIAL PLANNER™ practitioner and Registered Representative with LPL Financial for over 34 years. George can be followed on twitter @gurist and can be reached at 315-445-2147 or at firstname.lastname@example.org. Securities offered through LPL Financial. Member FINRA/SIPC